What Goes Up

Friday, 13 November 2015

Last month, Apple’s latest earnings call announced its “most
successful year ever.” The numbers were reported, the stories
were spun and Wall Street basically anointed Apple the god of
capitalism.

They’re all wrong.

Apple wasn’t wrong — fiscal 2015 was Apple’s most successful year ever, by the objective measures of both revenue and profit. I suppose you can decide to define “most successful year ever” in terms of something else, like percentage growth or stock price gains, but revenue and profit are pretty fair measures.

The actual story, the story we should be telling, involves a
different narrative. Apple is the largest company in the world,
but success is fleeting. While the numbers are impressive, they
don’t come close to painting an accurate picture about how much
trouble Apple is really in.

Apple’s rise under Steve Jobs was historic. Its fall under Tim
Cook is going to be much slower, more painful.

The fall usually is more painful than the rise. Who writes a sentence like that?

And if Apple’s fall under Cook is much slower than its rise under Steve Jobs, it’s going to take 20 or 30 years. Apple’s revival was long, slow, and relatively steady.

Apple lives and dies by the iPhone. iPad sales are flat,
iPod’s are all but irrelevant, and while Mac sales are up,
they’re nowhere close to the workhorse that can continue to
carry Apple should they experience a downturn in iPhone sales.
There is no Plan B.

Clark makes it sound like this is because the rest of Apple’s business is in decline, whereas the truth is that the iPhone continues to grow at an astonishing rate that even Apple’s other successful products can’t match. Is it worrisome that iPad sales continue to decline? Sure. Would it be better for Apple if the iPad were selling in iPhone-esque quantities? Of course. But iPad still sold 9.9 million units and generated $4.3 billion in revenue last quarter.

Arguing that Apple is in trouble because the iPhone is so popular is like arguing that the ’90s-era Chicago Bulls were in trouble because Michael Jordan was so good. It’s true Jordan couldn’t play forever — and the iPhone won’t be the most profitable product in the world forever. But in the meantime, the Bulls were well-nigh unbeatable, and Apple, for now at least, is unfathomably profitable.1 Just like how it’s better to have loved and lost than never to have loved at all, it’s better to have tremendous success for some period of time than never to have had tremendous success in the first place. Right?

Apple’s total revenue for last quarter was $51.5 billion. The iPhone accounted for $32.2 billion of that, which means Apple’s non-iPhone business generated about $19.3 billion in revenue. All of Microsoft in the same three months: around $21 billion. All of Google: $18.78 billion. Facebook: $4.5 billion. Take away every single iPhone sold — all of them — and Apple’s remaining business for the quarter was almost as big as Microsoft’s, bigger than Google’s, and more than four times the size of Facebook’s. And this is for the July-September quarter, not the October-December holiday quarter in which Apple is strongest.

Nothing in the world compares to Apple’s iPhone business, including anything else Apple makes. But a multi-billion-per-quarter business here (Mac), a multi-billion-per-quarter business there (iPad), a “Services” division that generates more revenue than Facebook, and an “Other” category (Watch, Apple TV, Beats, iPod) that booked $3 billion in a non-holiday quarter — and it’s clear that Apple’s non-iPhone businesses, combined, amount to a massive enterprise.

Apple’s iPad sales are on the borderline of being immaterial to
the company, but some analysts are betting that enterprise sales
of the iPad Pro can turn the product line around. […]

Nevertheless, the iPad franchise is sucking wind relative to the
iPhone. Apple’s annual report shows the iPad is 10 percent of
overall sales. Once a business falls below 10 percent a company
doesn’t have to break it out. In other words, the iPad could be
lumped into “other” with the Apple Watch and iPod if current
trends continue.

This is a product line that, in and of itself, generated just about exactly the same revenue last quarter as all of Google’s non-advertising business did for the entire fiscal year. But Apple is the company that is considered lopsided and worrisomely dependent upon a single product.

Name a product introduced in the last five years that has been more successful than the iPad — either in terms of revenue and profit for its maker, or in terms of aggregate hours of daily use and customer satisfaction of its users. I can’t think of one.

Third, Apple may have peaked. Call me a hater, but what reason is
there to assume Apple’s reputation is going to stay where it is?
The watch was a flop, and their only consistent source of success
is the iPhone, as the market for Macs and iPads is drying up (as
it is for all computer hardware companies).

Forget the fact that Mac sales are growing, or that iPad sales, though in decline, remain roughly 10 million per quarter. What I enjoy about this is Lancaster’s having written off the Watch as a flop — he even uses the past tense.

Apple has shipped seven million Apple Watches since its
introduction this spring, giving the technology giant a firm lead
in the nascent smartwatch market, according to researcher Canalys.

That number falls shy of some Wall Street analysts’ expectations
for Apple’s first new device category since 2010. But, for
perspective, consider this: Apple sold more smartwatches from
April through September than all other vendors combined sold over
the past five quarters, Canalys reports.

If we estimate the average selling price for an Apple Watch at $500 (reasonable), that’s $3.5 billion in revenue for the year to date — prior to the holiday quarter that is almost certainly going to be the strongest for watch sales annually.

Back to Bryan Clark’s TheNextWeb piece:

Steve Jobs is almost entirely responsible for Apple’s cult-like
following.

By streamlining the company in an attempt to make it profitable,
the same vision started to makes its way through every product
Apple created. Rather than bloated and flashy, Jobs created a
movement of decidedly minimalist devices that required not much
more than an occasional charge and a user that knew where the
power button was.

Between aesthetically pleasing design, rock-solid hardware, and
software that responded as if it were built for the machine —
not in spite of it — Apple culture became a cult of
Jobs-worshipping consumers willing to buy anything with a
lowercase “i” in front of it.

That never happened. The G4 Cube didn’t sell. iPod Hi-Fi didn’t sell. Those weren’t just non-hit products — they were both products that Steve Jobs himself really liked. I’ve heard that he had a stack of unopened iPod Hi-Fis in his office. Apple products have never been blindly accepted by the mass market — they’ve succeeded on their merits and by meeting actual demand. As I wrote two years ago:

To posit that Apple customers are somehow different, that when
they feel screwed by Apple their response is to go back for more,
is “Cult of Mac” logic — the supposition that most Apple
customers are irrational zealots or trend followers who just
mindlessly buy anything with an Apple logo on it. The truth is the
opposite: Apple’s business is making customers happy, and keeping
them happy. They make products for discriminating people who have
higher standards and less tolerance for design flaws or
problems.

Clark finally tells us what Apple’s biggest problems are:

There are larger issues on the horizon: For example, how does
Apple compete with Windows and Android?

Both have proven to be amazingly adept in recent years not only at
competing with Apple in form factor, but functionality as well.

Two companies that are innovating, not searching for identity
outside of a singular product.

Two companies that are on the way up, not down.

Windows and Android, got it.

The Apple Watch is great, but it’s never going to carry Apple like
the iPhone until it works like one. The watch is undeniably cool,
but it really fails to do anything better than your phone.

To make matters worse, you have to have an iPhone close by in
order to even use most of its features. Similar Android models are
self-contained and only require an occasional sync.

The autonomous car project sounds promising, but competing against
Google and Tesla in addition to auto industry giants like Lexus
and Mercedes is an uphill battle full of technology challenges,
government red tape and changing century-old transportation
conventions.

The best I can gather from this mishmash of a conclusion is that Apple Watch should have somehow debuted as a first-generation product that could stand toe-to-toe with the iPhone (which is now in its ninth generation), and that Apple’s car product should already be here. If there were no rumors of an Apple car, we’d be hearing that Apple is going to miss out on the next big industry that is ripe for disruption from the tech industry. But because there are rumors and hints pointing to an Apple car, we’re hearing that cars are too difficult, the established companies too entrenched. Ed Colligan’s line for the ages — “PC guys are not going to just figure this out. They’re not going to just walk in.” — was also about an industry full of longstanding giants, Google, technology challenges, government red tape, and century-old conventions. Minus the “government red tape”, that’s a pretty good description of the watch and home entertainment system industries, too.

I’m not here to argue the opposite of Colligan — that Apple’s success in these new fields is preordained — because that would be foolish. But it’s just as foolish to argue that Apple can’t succeed — or that anything less than iPhone-sized success in a new endeavor is a failure.

The iPhone, however, is unlikely to take a year off in the prime of its career to play baseball. ↩︎